Can government spending activities have a positive impact on economic activity?

Can government spending activities have a positive impact on economic activity? Do federal spending programs designed to offset a recession’s negative effects add a boost to GDP growth? Can government purposefully and successfully take steps that will increase employment?

The key conclusions are on the last page. After describing three hurdles to stimulus spending as an effective policy tool, we find:

It may be that when a country is small, private investment is commensurately small, financial markets are less developed, and government can play a useful role in funding industries that require large start-up costs. This need would diminish as the country’s economy develops. The implication is that there may be a fourth hurdle: even if Keynesian theory were correct, and even if policy makers could get the timing right, and even if they had the political will to reverse stimulus spending at the ends of recessions, stimulus spending would become less and less potent over time as a country’s economy grew.

Comments & Responses

3 Responses so far.

Government tax-and-spend will only improve the economy if-and-only-if the Government make wiser investments and spendind decisions than would be otherwise made; ignoring for a moment the morality of arbitrarily confiscating someone’s wealth. Government print-and-spend will only improve the economy if-and-only-if the new money is invested more wisely than the wealth lost by the population due to inflation.

The words “wise investments” and “government” don’t often appear in the same sentence.

It’s interesting, isn’t it, that conservatives tend to place a great deal of emphasis on the freedom of rich people not to be deprived of money, but rather less emphasis on the freedom of poor people to put in place mechanisms to help them make money?

(Just as an addendum to my previous post: of course conservatives would say that the best way to help everybody is to let the state become smaller and give ‘wealth creators’ more money, but is there much evidence that disadvantaged people’s wealth increases much as a result of that? After all, in the UK, the richest people are getting richer, but the country as a whole clearly isn’t.)

Liberty – for peace and prosperity

Steve Baker is working for you in Wycombe as the Conservative MP.

Steve was first elected to Parliament in 2010. He was previously an RAF engineer officer then a consulting software engineer. Find out more...

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